The drop in the price of a previously little-known digital currency has excited the entire cryptocurrency industry. The TerraUSD currency, whose rate is actually expected to be tied one-for-one to the US dollar, has fallen by about 70% in the past few days and was $ 0.63 on Thursday, according to industry report CoinMarketCap.com. According to Bloomberg’s calculations, the market as a whole has been wiped out at $ 200 billion since the cryptocurrency boom peaked in November.
“The collapse of the TerraUSD peg has had some nasty and predictable side effects,” said Richard Usher, manager of digital currency financial services firm BCB. One of them is the sell-off in other cryptocurrencies such as Bitcoin or Ethereum. Their rate has dropped by 18 and 25 percent since the beginning of the week. TerraUSD is one of the so-called stablecoins. Their prices are tied to other values such as the US dollar or gold. This is intended to avoid the price caper, which is the order of the day with Bitcoin. Because with the latter, only supply and demand determine the price. While most stablecoin providers guarantee the price link with dollar or gold deposits, for example, TerraUSD is a “decentralized” stablecoin. Here, a complex mechanism of trading with other cryptocurrencies should automatically hold the course at one US dollar per TerraUSD. With a total market capitalization of $ 7.6 billion, TerraUSD is the No. 14 according to CoinMarketCap.com.
With markets collapsing in tandem, traders have pointed to cryptocurrency chaos as a focal point. Strategists are increasingly concerned that retail investors, who are already taking losses on meme stocks, will be wiped out with their cryptocurrency holdings and sell everything else. “The contagion here is not due to the connections between the crypto scene and the traditional financial system, but through the sentiment of retail investors,” said Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co. “When the capital loss of $ 1 trillion in cryptocurrency markets caused a large-scale withdrawal by retail investors to other risky assets such as stocks, this is where the contagion happens. “
On the heels of TerraUSD, the price of the best-known stablecoin, Tether, also slid to $ 0.95 on Thursday. Since Tether isn’t sufficiently transparent about which stocks it holds it uses to maintain its dollar peg, it’s a natural target for speculators, BCB expert Usher said. However, Tether is more established than TerraUSD. Therefore, the price will soon stabilize at one dollar. With a market value of around $ 82 billion, Tether is the third largest cryptocurrency behind Bitcoin and Ethereum. This IT motto accounts for roughly half of the added market capitalization of all stablecoins.
In this context, governments want to push the regulation of the sector. Ashley Alder, head of the World Organization for Securities and Exchange Commissions (IOSCO), has signaled the creation of an international cryptocurrency authority for the next year. In addition to climate change and the pandemic, this is the third important issue for governments. The US Federal Reserve had recently warned of declining stablecoin prices because the value of deposits, which are meant to ensure price fixing, could fall in turbulent times on the stock exchange.